The S&P 500’s recent decline from its December 6th peak might seem insignificant at a mere 3%. However, a deeper dive into market internals reveals a more concerning picture, suggesting potential weakness and hidden risks for investors. This analysis delves into the underlying damage, exploring key technical indicators and expert opinions to provide a comprehensive understanding of the current market landscape.
While the overall index decline appears modest, the performance of individual stocks paints a different story. Since the December peak, a mere 19% of S&P 500 constituents have registered positive returns. More alarmingly, over half of the stocks within the index have experienced losses exceeding 5%, with approximately 20% plummeting by 10% or more. Notable examples of this downturn include significant declines in high-profile companies like Chipotle (11%), Palo Alto Networks (12%), and Adobe (23%).
Chart showing S&P 500 performance.
Further reinforcing this negative trend are key technical indicators. One widely followed metric, the percentage of S&P 500 stocks trading above their 200-day moving average, has plummeted from approximately 75% in early December to a low of 50% recently, marking its lowest point since November 2023. This substantial 25 percentage point drop, occurring alongside a relatively small 4% decline in the overall S&P 500 index, raises red flags for potential market vulnerability.
According to Adam Turnquist, chief technical strategist at LPL Financial, this divergence between price and breadth often foreshadows weakness in a rally. Historically, when the percentage of S&P 500 stocks above their 200-day moving average falls below 48%, average 12-month forward returns have been negative, averaging -7.3%. The S&P 500’s rising 200-day moving average, currently around 5,585, is identified as a potential support level. However, reaching this level would represent a further 6% decline from current levels and an overall peak-to-trough decline of roughly 8%.
Another indicator highlighting the breadth divergence is the equal-weighted S&P 500 index, which has suffered a more pronounced 7% decline since December 6th – nearly double the loss of the market-cap weighted S&P 500. This disparity underscores the widespread damage inflicted on individual stocks, even as the headline index decline remains relatively contained. Dan Greenhaus, chief strategist at Solus Alternative Asset Management, emphasizes that focusing solely on the headline index figures overlooks the significant declines experienced by numerous individual stocks, particularly within the technology sector.
Despite the concerning signals from market internals, some experts view the current situation as a potential buying opportunity. Turnquist suggests that a deeper drawdown could present a chance to re-enter the bull market, particularly given the S&P 500’s position above its longer-term uptrend and generally solid fundamentals.
Greenhaus echoes this sentiment, specifically referencing the burgeoning AI sector and the broader technology landscape. He posits that if the underlying fundamentals remain strong, investing at current levels could be strategically advantageous. This perspective highlights the potential for long-term growth despite the short-term challenges revealed by the market’s internal dynamics.
In conclusion, while the S&P 500’s headline decline may appear modest, the underlying damage to market breadth warrants careful consideration. Technical indicators and expert opinions point to potential weakness and the possibility of further declines. However, this period of uncertainty may also present strategic buying opportunities for discerning investors who maintain a long-term perspective and focus on strong fundamentals.
